Gold Mid-Year Outlook 2024

H2: inflection ahead?

The global economy and financial markets are in a transitional period. Bond yields have moved generally sideways as Western central banks have kept policy rates on hold. But pressure is mounting on policymakers as they balance lower but stubborn inflation and signs of cooling labour markets. This is exemplified by the sooner-than expected rate cut by the European Central Bank (ECB), while the Bank of England and US Fed have so far stayed put. Meanwhile, India remains one of the economic bright spots, and China will likely continue to find alternative measures to invigorate growth.  

In this context, we analyse how gold may react to current market expectations and explore the drivers that could lead to a different outcome.

A (largely) efficient market

Analysis based on Qaurum^SM and our Gold Valuation Framework suggests that the gold price today broadly captures consensus expectations for H2 in relation to economic growth, interest rates and inflation (Table 2).  

This, in turn, implies that gold may continue to move in a similar range to what we have seen in recent months. In other words, after gaining good momentum in the first half of the year, current market trends indicate a rangebound performance from its current levels during H2.

Second, given that gold is already up by more than 10% and consensus suggests a similar result for the full year, it reiterates that gold – supported by contributions from other sectors – can perform well even when rates remain as expected.

Western investors: wanted

Given the inherent complexity in forecasting economic and financial variables, market consensus may be telling us more about the world today than looking ahead to H2. As such, it is important to understand the conditions that could divert us from the current view.

For gold, Western investors have been a missing part of the puzzle. While investors have been active – as denoted by high market volumes – retail investment demand has been low and gold ETFs have seen net outflows y-t-d. Gold’s strong performance, despite the absence of strong Western flows, suggests that, unlike previous periods when gold broke record highs, the market is still not saturated and could see another leg up (Chart 2).

Demand from this segment of the market could be triggered from three key sources: interest rates, recession risks and geopolitics.

Interest rates

Since the rate cut by the ECB in May, European gold ETFs have experienced inflows. A continuation of this trend would provide further support. And while there’s already a 25bp cut by the Fed priced-in by the market for later in the year, the actual policy decision would bring reassurance to investors about the direction of rates going forward, thus fostering sustained inflows. On the flip side, of course, higher-for-longer may deter some gold investors from entering the market.

Recession risks

While a recession remains a low probability in the immediate term, the global economy is not firing on all pistons and, with inflation above target, central banks are not ready to cut rates more aggressively just yet. There also seems to be some complacency in financial markets. Global stocks are doing well overall with US stocks – or a subset thereof – leading the pack. And volatility is near 30-year lows. Yet, historically, there’s a strong relationship between the strength of manufacturing and company earnings and, at present, manufacturing is showing signs of slowing (Chart 3). 

Geopolitics

While the current unease could be seen simply as the new normal, geopolitical risk has been on the rise in recent years and is unlikely to abate anytime soon (Chart 4). Political polarisation, armed conflicts and erosion of globalisation in favour of nationalism and select alliances fuel economic instability. Geopolitical risk is particularly difficult to predict and may come from where it’s least expected. What is true, however, is that gold reacts to geopolitics, adding 2.5% for every 100-points the Geopolitical Risk (GPR) Index moves up.²  And while part of this effect can be transient, it could also be a trigger for deteriorating financial conditions, which may have a more lasting effect. 

Consumers as price makers

It is often posited that consumers tend to be ‘price takers’ rather than ‘price makers’. In the short-term, this may be the case. However, gold jewelllery and technology combined make up more than 40% of annual demand. As such, gold consumers play an important role in supporting – and sometimes slowing down – performance. And they usually respond to two key factors: price and income. In this case, the sharp upward trend in the gold price has dampened demand in some markets such as India and China. But positive economic growth can counteract some of this effect. In addition, possible gold price stability can lure back consumers who often respond more negatively to volatility than the level of the gold price. This may be particularly relevant for India, where expectations of economic growth are higher than other regions and gold’s role as a store of value is well cemented.

Connecting the dots

Our analysis showcases gold’s likely reaction to the underlying conditions behind market consensus, as well as alternative hypothetical scenarios (Table 3). While there appear to be many moving parts, Qaurum allows us to paint a clearer picture of these interactions. 

In summary, gold may remain rangebound if current market expectations prevail. However, there’s a clear path for gold to outperform from here, likely fuelled by Western flows. Conversely, in the event that central bank demand drops drastically, rates remain high for longer and Asian investor sentiment flips, we could see a pullback in the second half.   

Overall, the extent of gold’s reaction upwards or downwards will be a function of the magnitude by which each of the aforementioned factors – or a combination thereof – move. 

It is also important to note that each of these scenarios has implications for other asset classes. A robust asset allocation strategy must take into account not just market consensus but alternative views. And in that context, our analysis shows that gold plays a key role as a diversifier and source of liquidity, coupled with its positive long-term returns. 

Footnotes

¹Based on the LBMA Gold Price PM in USD as of 27 June 2024.

²The GPR index by Matteo Iacoviello measures both actual and perceived geopolitical tension. See: Geopolitical Risk (GPR) Index (matteoiacoviello.com)

³Gold Focus 2024, Metals Focus, May 2024.